Economic Downturns

October 19, 2009

As a follow-up to our earlier Pulse Check posts in March and July, here is another round-up of the latest surveys and studies indicating how the nonprofit sector is handling the effects of the recent economic downturn.

Glass Half Full or Half Empty? Results of GuideStar's Latest Nonprofit Economic Survey (August 2009)GuideStar’s most recent nonprofit economic survey takes a look at the financial health of charitable organizations from March-May 2009. They found that since the last update, covering October 2008-February 2009, the percentage of nonprofits reporting decreased contributions has remained steady at 52%. Other findings showed that:

18% of responding nonprofits saw their contributions increase, while 29% reported that their contributions had stayed about the same from the previous survey period.

Nonprofits reported that the decrease in giving was the result of the following:

Volunteering in America: Research Highlights (August 2009) [PDF]The Corporation for National and Community Service collects information on the American volunteer landscape in an effort to track changes and developments that may be useful for civic leaders and nonprofit organizations. Some of the key findings showed that:

In 2008, 61.8 million Americans or 26.4 percent of the adult population contributed 8 billion hours of volunteer service worth $162 billion, using Independent Sector’s 2008 estimate of the dollar value of a volunteer hour ($20.25).

As the economy slows and nonprofit organizations struggle to provide services on smaller budgets, volunteers become even more vital to the health of our nation’s communities. Between September 2008 and March 2009, more than a third (37%) of nonprofit organizations report increasing the number of volunteers they use, and almost half (48%) foresee increasing their usage of volunteers in the coming year. Almost no nonprofit organizations are showing a decrease in their volunteer usage.

Volunteers were much more likely than non-volunteers to donate to a charitable cause in 2008, with 78.2 percent contributing $25 or more compared to 38.5 percent of non-volunteers.

57 charities and foundations—29 percent of the 195 groups that responded—reported that their top executive had taken a pay cut this year due to the recession, declined raises or bonuses, or had his or her pay frozen. The median pay cut was 10 percent.

The median compensation for chief executives at the organizations surveyed was $361,538, based on information from 253 groups that provided data for both 2007 and 2008. In 2007 the median compensation was $330,395.

October 12, 2009

Bradford K. Smith, president of the Foundation Center, will provide his perspective on the impact of the economic crisis on the philanthropic sector – both foundations and service providers – and the challenges and opportunities these turbulent times present for the future.

This 60-minute program will be presented at the Foundation Center-Atlanta on Tuesday, Oct. 13, starting at 2:30 p.m., but you can attend virtually via the text-based chat window below. Set a reminder below and plan to join us!

&ampampamplta href=&ampampampquothttp://www.coveritlive.com/mobile.php?option=com_mobile&ampampampamptask=viewaltcast&ampampampampaltcast_code=9186a832a1" &ampampampgtChallenges and Opportunities of the Economic Crisis</a>

Based on a survey of one hundred nonprofits, the report (results, 7 pages, PDF) found that organizations in the region expect to see declines in foundation funding (67 percent), government revenues (54 percent), and gifts from individual and corporate donors (40 percent), while experiencing an increase in demand for their services (80 percent). Only 17 percent of respondents expect to do better than break even for the current fiscal year, down from 35 percent a year ago.

Despite the grim outlook, nonprofits indicated they are stretching their resources, financial and human, to meet the needs of their constituents, with more than half saying they have either collaborated with another organization (59 percent), engaged more closely with their board (56 percent), planned to hold conversations with funders to discuss financial realities (55 percent), or developed a "worst-case scenario" contingency budget (51 percent). At the same time, fewer than half the respondents expecting an increase in demand for their services are planning to reduce programs.

The latest findings are markedly different from the results of a similar survey taken in March in which less than half the organizations surveyed planned to collaborate on programs and only 13 percent had or were planning to partner to reduce administrative costs.

"For many nonprofits, 2010 will be even more difficult than 2009 as economic uncertainty continues to buffet the sector and exacerbate long-standing problems," said Nonprofit Finance Fund vice president Dione Alexander. "The actions that Northeast Ohio nonprofits are taking to address systemic issues give hope that they will emerge from these tough times stronger and able to continue to meet the growing needs of the communities they serve."

September 17, 2009

A: Both are structured ways for organizations to think about the future. In the context of planning, the terms "contingency" and "scenario" are sometimes used interchangeably. In simple terms, a contingency plan can be described as your organization’s “Plan B” or "worst case scenario" and is often tied to something specific, like a natural disaster. They are also sometimes called business continuity plans or disaster recovery plans. Scenario planning, on the other hand, is a “strategic planning method expressly developed to test the viability of alternative strategies," according to Mal Warwick in his book, Fundraising When Money is Tight. Warwick suggests six steps for creating an effective scenario plan, starting with exploring answers to the question, "What keeps you awake at night?," to draw out fundamental issues, and concluding with testing your strategic choices using “what-if” reasoning. Warwick describes scenario planning in detail and goes on to suggest Peter Schwartz’s classic 1991 book, The Art of the Long View, for further reading. (Listen to our February 2009 podcast with Mal Warwick here.)

In the July 2, 2009 Chronicle of Philanthropyarticle “Worst Case Scenarios,” author Ben Gose advocates that forming a contingency plan can help a nonprofit navigate the recession more successfully. Offering tips ranging from setting priorities and identifying "trip wires" (actions to take when revenues drop, for example), Gose cautions that organizations must come to terms with the fact that “painful decisions will still have to be made.” However, Mr. Gose goes on to note that during contingency planning “a charity may find that a program it considered cutting is in fact worth saving, and that finding can make a compelling story for donors.”

ScenarioThinking.orgOpen community on scenario thinking and scenario planning where you can publish scenarios, reflect on the planning processes and share online resources about scenario planning in a democratic and inclusive manner.

September 09, 2009

A: According to a Forbes article on the World's Top Microfinance Institutions, private investor microfinance funding totaled $2 billion in 2006. So what is microfinance and who benefits? MIX Market, a web-based information portal that disseminates information on public and private funds that invest in microfinance globally, introduces the idea of microfinance in these terms:

"To most, microfinance means providing very poor families with very small loans (microcredit) to help them engage in productive activities or grow their tiny businesses. Over time, microfinance has come to include a broader range of services (credit, savings, insurance, etc.) as we have come to realize that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products."

In case anyone wonders whether microfinance is a profitable venture, the Capco Institute reported in the Journal of Financial Transformation that of a sample group of about 700 microfinance institutions (MFIs), the top 176 MFIs experienced a return on equity (RoE) of 17.2%. But what of the effects of the global financial crisis? A new surveyby the UK-based Centre for the Study of Financial Information reports that while the sector itself has a growing client base, microlending may be faced with its first major "stress test", tackling the immediate concerns of liquidity shortages, bad loans and credit risk.

In the US, microlending seemed to be making an upswing in the midst of the recession among small business entrepreneurs, according to a February MSNBC article. One of the major global microlending institutions, Kiva, recently launched Online Microfinance in the US, which enables individual lenders to make small loans to US-based entrepreneurs.

Other major players in the arena, both nationally and internationally, include ACCION and The Grameen Foundation, both of which provide stories and updates on their websites of ongoing microlending projects and opportunities around the globe.

July 28, 2009

Foundation Center president Bradford K. Smith and GuideStar president and CEO Robert G. Ottenhoff discuss how nonprofits and foundations are weathering the economic storm, and the challenges and opportunities for both going forward. Listen!

Managing in Tough Times: May 2009 Nonprofit Leaders Survey Update (June 2009). To update their November study, Managing in Tough Times: 7 Steps, the Bridgespan Group surveyed nearly 100 nonprofit leaders in May 2009 to find out how the ongoing recession is currently affecting their organizations. Here's a sampling of what they found:

Since November 2008, the percentage of nonprofits reporting funding cuts has increased from 52 percent to 69 percent.

The percentage reporting cuts of more than 20 percent has increased from 13 percent to 24 percent.

70 percent of small organizations (those with revenues less than $1 million) reported that their financial picture had worsened in the past six months, compared with 38 percent for medium and 41 percent for large organizations ($1 million to 10 million, and greater than $10 million, respectively).

Foundations Address the Impact of the Economic Crisis (April 2009). An examination of how foundations have been responding to the current economic crisis, this research advisory is based on early 2009 survey responses of more than 1,200 U.S. foundations. It is part of an ongoing Foundation Center research series intended to shed light on the impact of the economic downturn on the nonprofit sector. Key findings:

Close to two-thirds of surveyed foundations predict reductions in the number and/or size of their grants in 2009.

Most respondents expect to maintain the number of program and geographic areas they currently support.

Two out of five respondents expect to dip into their endowment principal to fund their 2009 grants budgets.

Over half of respondents anticipate engaging in more non-grantmaking activities in response to the economic downturn.

More than one-third of community foundation respondents are engaging in special initiatives in response to the economic crisis, compared to 14 percent of respondents overall.

June 17, 2009

A: Keeping cash in reserve for a "rainy day" may seem like a luxury during an economic downturn, but maintaining a nest egg might ensure your organization's long-term financial health.

The Nonprofits Assistance Fund, a Minneapolis-based nonprofit whose mission is to build financially healthy nonprofits that foster community vitality, provides this explanation of how an operating reserve works:

[A]n unrestricted fund balance set aside to stabilize a nonprofit's finances by providing a “rainy day savings account” for unexpected cash flow shortages, expense or losses. These might be caused by delayed payments, unexpected building repairs, or economic conditions.

Reserves should not be used to make up for income shortfalls, unless the organization has a plan to replace the income or reduce expenses in the near-term future. In short, reserves should be used to solve timing problems, not deficit problems.

A commonly used reserve goal is 3-6 months' expenses. At the high end, reserves should not exceed the amount of two years' budget. At the low end, reserves should be enough to cover at least one full payroll.

However, each nonprofit should set its own reserve goal based on its cash flow and expenses. Organizations that have contracts or fees with regular and reliable payments don't need as much in cash reserves as organizations that rely on periodic grants, fundraising events or campaigns, or seasonal activities.

To be a viable operating reserve, there should be a board agreement and policy about how reserve funds can be used: When they can be used, who is authorized to use them, and how this is reported to the board.

To learn more about this topic, selected resources below may be helpful.

Nonprofits Assistance Fund: The Yin and Yang of Operating Reserves: What You Need to Know [PDF]Executive director Kate Barr advises on how large a nonprofit's operating reserve should be and how to fund it. Includes a table that aligns an organization's income characteristics with a recommended amount of reserves.

Nonprofits Assistance Fund: The Cash Reserves MythKate Barr argues that a 3-month minimum of operating reserve may not suit all nonprofits. Instead, each nonprofit needs to analyze its cash flow, then create a workable and customized policy.

Nonprofit Times: Nonprofits and SquirrelsRichard F. Larkin, CPA, discusses how to decide on the size of your nonprofit's operating reserve.